Court case: Treasury agreements aiding the rich evade paying taxes

Lobbies have faulted treaties that allow companies to register in low tax jurisdictions thus denying Kenya revenues.

This claim is contained in a court case questioning the government’s double taxation agreements sanctioned by the Treasury, denying the country billions of shillings in taxes.

“It is the petitioner’s claim that for the double taxation agreements (DTAs) under consideration, it appears that instead of having a fair agreement, it is skewed towards the capital-rich thereby causing significant tax base erosion in Kenya (the source country),” the case filed before the High Court in Nairobi reads in part.

One of the agreements being questioned is a deal with Mauritius, a country with lower tax rates compared to Kenya. The agreement was gazetted last year, but implemented this year.

In the deal, Kenya is said to have agreed that profits collected from operating aircraft shall be taxable in the country that the companies are registered. In the event the partner country decides to charge tax, it cannot exceed 50 per cent of its tax bracket.

Tax Justice Network Africa (TJNA) and Katiba Institute (KI) through their lawyer Bashir Mohammed argue that poor Kenyans are facilitating billionaires live large abroad even as the Government makes it easier for them to legally avoid high taxes.

Mohammed said that all the 10 DTAs signed appear to be similar and they limit withholding tax to 10 per cent. “Whereas the Kenyan domestic rate is 20 per cent, they thereby provide a tax exemption benefiting residents of the other contracting State,” Bashir claimed adding that the agreements also exempt capital gain taxes of any moveable properties including shares in Kenyan companies.

It is claimed that companies established in the partner states and which have a ‘permanent establishment’ in that country for six months are exempt from paying taxes on their profits.

“This not only exempts residents of the treaty partner from such taxes. It enables the use of holding companies resident in the treaty partner to own land and other natural resources, so that the gains from alienation of such immovable property may avoid taxation in Kenya. This may benefit not only non-residents, but Kenyan citizens or resident can also dodge Kenyan tax by round-tripping their investments illicitly through such holding companies,” he claimed.
 

Tax havens

The lobbies told High Court Judge Anthony Murima that Kenya has signed agreements with at least 10 countries, three of which have been ranked to be tax havens. The agreements, they claim, include the not to tax ‘any other income’ that is not specifically spelt in the DTAs for residents of the treaty partners living in their countries.

This is the case for the treaties with Iran, Kuwait, Mauritius, The Netherlands and Seychelles. “This has an effect of preventing the application of Kenyan tax to the incomes of residents of those treaty countries,” lawyer Mohammed explained in the court papers.

“It is the petitioners’ observations that DTAs as signed by the second respondent (Treasury Cabinet Secretary) is prejudicial to Kenya.”